Buyside Viewpoint from a Fixed Income PM

Background

I'm fairly new to this website but have read some fantastic posts that get a lot closer to the reality of both the buy and sell-side than other resources I've seen. So, I figured I'd post my two cents as a starting point. This was mainly prompted by reading BlackHat's discussion on how he went about reading a 10-k. I thought the detail he provided was absolutely worthwhile for anyone trying to understand how to go about reading an annual report. Frankly there was a lot of insight there that surpassed some of the generic Level II CFA material. What I mean by that is that although the nuances of FCF and balance sheet reporting are essential to grasp, BlackHat covered a lot more of what I would generically describe as

critical thinking

I can't stress enough how important it is to take a step back and think about what you're doing, why you are doing the analysis you're doing, and how it will be used. This is critical, whether it is you that uses the research at some point in your career to take on an active weight, or whether you're trying to think through the lense of a PM and you are asked to do the background research, even if you don't have the ultimate buy/sell decision. With that said, I'd like to discuss how I ended up at a small investment manager (less than $10 billion AUM).

My introduction

First of all, one of my colleagues that introduced me when I spoke at his college a few years back started by reading his graduate financial math students my background (I am a CFA charterholder but don't have a masters degree for point of reference and I didn't work at a bulge bracket bank training program. My early career path was non-traditional, if there is such a thing as traditional anymore. I didn't attend an Ivy League university.). He said, " I want you guys to notice one thing first, and this is a huge thing to note before going into any more detail....you don't just roll out of bed and become a portfolio manager. You become an analyst somewhere doing something, even if it is not the exact thing you thought you'd be doing or the exact thing you thought you wanted. When you're lucky enough to get that job, you learn everything you possibly can about the capital markets, about your job, about the industry, about the economy, about what the different roles in the industry mean and how it all fits together. You take your job seriously and excel at it, even if it is really boring. Only then will you be lucky enough to hopefully be able to use some of your financial education in a role where it is useful to have that education. After paying your dues, down the road you might be able to do something that interests you, but probably not right away."

Always felt a step behind

His comments hit me like a truck; I'd always thought I was a step or two behind some friends in the industry that got into trading roles early-on. I always thought of starting in the industry doing quantitative modeling of pension and insurance asset/liability management and asset allocation boring and an obstacle to my true calling - being an equity PM deciding what stocks to buy and sell. Pensions were very 20th century in my mind and I really didn't know much about them except for the fact that only government workers and old people got income from them. When I got the quant analyst job in my early 20's at a large Asset Management firm, I thought it was a stepping stone - soon I'd be a big-time equity PM if I was committed enough and smart enough, I thought to myself. This quantitative modeling is one of the most boring things I've ever done, I also thought to myself. I understand financial statements and business models, and have a good economics degree from a top liberal arts school, I thought to myself. Man, I didn't go to Wharton or Harvard but so-and-so who played hockey at my high school is trading at xyz investment bank and he got into Harvard even though I had better grades! What the hell! These are a collection of my disgruntled thoughts at the time...I hate the use of text-message-language but this one really does make me laugh-out-loud when I look back at how stupid I was. What an opportunity I had and what an idiot I'd been! Luckily, though I didn't realize it at the time, I was able to make the most of my opportunity even though I could have been a bit more positive at the time.

There is no formula after your first job

He also was trying to communicate something that I found extremely difficult when I was in my early 20's - there generally aren't 50 asset managers out there knocking your door down with job offers out of the blue. Believe it or not, many people in the asset management industry aren't mind-readers, and may not be aware of you, even if you went to a great school with great grades. When you go to a good school and you got good grades your whole life, you're used to things working out, even if it took a lot of hard work. You didn't really have to uncover opportunities even if you did have to work very hard to create those opportunities. What I mean by this is that in high school, you might have had to work your butt off to get in the top 5% in your class but there was essentially a formula. Here is the curriculum, understand/memorize it, get A's in your AP classes - repeat. Study for the SATs and get into a good college. Major in finance or economics, and get good grades in those classes, and everything will just fall into place, especially if you were a good college athlete while getting good grades - won't that communicate competitiveness as well as ability? What could go wrong? Well for starters, playing a sport that requires massive amounts of summer participation prevents you from getting a financial internship for the most part (but that's just another excuse). The real problem is that you have to actually figure out how to find opportunities, and you'll fail a lot, and you probably won't be used to that. After college I wasn't able to get the job I wanted right away at any bank or any asset manager, and I also probably didn't really look hard enough, even though I thought I did at the time. So, I took the job I mentioned above and after a couple of years doing that, I became a research analyst covering asset allocation and asset-liability management. Suddenly my boring background was very useful, as I discussed tail risk hedging and liability hedging, portable alpha, and yield curves as they relate to asset allocation. I still thought I was at least as far away as I'd ever been from being an equity analyst or PM, but at least some buy-siders were finding my research useful and I wasn't hating my job anymore.

How I ended up PM

A couple of years later, a very senior guy at one of those buy-side firms who found my research useful asked me if I'd like to be an investment strategist on their fixed income desk. They wanted someone to look at the asset/liability portfolios risk, monitor that and research topics relating to that, and discuss what's going on (or going right or wrong) with those portfolios with our pension clients. Ugh, more pensions and ALM I thought but again, I still thought it was a great chance to take another step closer as I would be working closely with the PMs. So I took the job and did work closely the PMs. It turns out that my ALM background was very useful in identifying risks in the portfolios versus the liabilities we were managing to, and by this point I was pretty fluid in convexity and duration, and statistics. I also was about to pass my CFA. About a year later, I was promoted to PM after demonstrating I understood the drivers of risk and return in our portfolios. Years later, here I am today and I love what I do. But, if you asked me 10 years ago, I would have said that I really was not doing what I wanted to do, and I was at the periphery of finance at best. This post went on a lot longer than I intended but the moral of the story is that nothing will be given to you and that you have to learn how to get knocked down and get back up if you have any chance in the industry. You also have to make your own luck.